Research indicates that these hidden costs can significantly affect index fund returns. Studies show that the adverse selection costs, combined with the price pressure from index reconstitution, can lead to substantial losses for investors over time.

For example, when stocks are added to an index, they often experience a price surge due to anticipated buying from index funds, which can reverse after the purchase, leading to losses.

This cycle of buying high and selling low is a critical flaw in the rigid structure of index funds.